Published and draft legislation - United Kingdom

Reforms to the corporate governance system

Government response to the green paper consultation

As reported in Issue 10 of Progreso, on 17th February the consultation period for the Green Paper presented by the British Prime Minister Theresa May’s government ended. The Green Paper proposes the reform of certain areas of corporate governance in order to strengthen market confidence in the country’s private sector.

At the end of the consultation period, the British government published this document, which analyses the feedback received on the Green Paper from nearly 400 companies. The government is making nine proposals for reform to British companies’ corporate governance system. The proposed measures include actions that would have to be taken by industry and regulatory bodies, as well as changes to the UK’s Corporate Governance Code and in upcoming legislation.

The proposals on the three key issues raised in the consultation are summarised below:

Executive pay

The government proposes to strengthen the hand of shareholders when decisions are taken about executives’ salaries and to increase transparency on this issue:

1. It invites the Financial Reporting Council (FRC) to review the UK’s Code of Corporate Governance and to bear the following considerations in mind:  

  • To define the measures that companies must take when there is significant shareholder opposition to executive salaries and bonuses.
  • To give remuneration committees greater powers to supervise their company’s pay and incentives, and to explain whether their executives’ pay is in line with the corporate remuneration policy. In addition, it adds that, in order to chair this committee, the chairperson must have sat on a remuneration committee for at least 12 months, unless there is a clear and cogent reason why this would not be appropriate or feasible, according to each specific case.
  • To extend from three to five years the minimum vesting and post-vesting holding period for executive share awards.

2. To modify the secondary legislation so that listed companies:

  • Issue an annual report disclosing the ratio of CEO pay (counting the entire pay package) to the average pay of their UK workforce, explaining the annual changes to this ratio.
  • Explain clearly and in detail remuneration policies that involve complex, long-term incentive plans.

3. To invite the Investment Association to maintain a public registry of companies that received “no” votes from at least 20% of their shareholders when their executive pay awards were approved; require them also to keep a record of the measures that companies adopt to address their shareholders’ questions and concerns.

Representation of employees and other stakeholder groups in business decisions

Company directors must comply with the duties described in section 172 of the 2006 Companies Act about taking into account the views and needs of their stakeholders (employees, customers, suppliers, etc.) to foster companies’ long-term success for the benefit of their shareholders. To strengthen this compliance, the government proposes:

4. To review the Code of Corporate Governance in order to highlight the importance of strengthening the voice at board level of employees and other stakeholders, which it deems a critical component of sustainable business management. Specifically,  it requires companies with a premium listing to adopt, on the basis of the “comply or explain” principle, one of these three employee participation mechanisms: designating a non-executive director to ensure that employees are considered when decisions are taken, appointing a director from the workforce, or having an employee advisory council.

5. To introduce new secondary legislation to oblige all companies of a significant size, whether they are public or private, to explain how their directors comply with the requirements in section 172.

6. It has asked the Investment Association and the Institute of Chartered Secretaries and Administrators (ICSA: The Governance Institute) to advise companies on practical ways to commit to their employees and other stakeholders. It also invites the General Counsel of the largest listed companies (the GC group in the FTSE100) to publish new advice and guidance on the practical interpretation of directors’ duties in complying with section 172.

Corporate governance standards for major privately held companies

Although the highest standards of corporate governance in the United Kingdom are to be found in limited companies, in which on the whole the owners or shareholders are not the executives running the firm, the Green Paper considered the option of extending the mentioned principles to major privately-owned companies. Addressing the comments received on this issue, the government proposes:  

7. To invite selected bodies (the FRC working with the Institute of Directors, the Institute for Family Business and the British Venture Capital Association, among others) to develop a voluntary set of corporate governance principles for large privately-held companies, under the chairmanship of a business figure with relevant experience.

8. To introduce new secondary legislation to require all firms of a significant size to disclose their corporate governance arrangements in their Directors’ Report and on their website.

Other issues

The Green Paper included a section which invited suggestions on other corporate governance issues not dealt with in earlier sections. After the consultation, certain concerns were seen to exist as to whether the FRC has sufficient powers, resources and status to perform its duties effectively.

9. To deal with these questions, the government asked the FRC, the Insolvency Service and the Financial Conduct Authority to revise their memoranda of understanding or conclude new ones before the end of the year, to ensure that they can enforce disciplinary measures on directors whose conduct does not meet the principles and guarantee the integrity of corporate governance reporting.

Next steps

The British government intends these reforms to become law in June 2018. The secondary legislation bill is scheduled to be laid before Parliament prior to March 2018.